Health, National Cess To Not Impact GST Collections, Says FM Sitharaman

The Union government has proposed higher taxes on tobacco products and a new cess on pan masala manufacture, aiming to protect revenue and raise additional funds for health and national security, as two Bills were introduced in Parliament on December 1, 2025.

Union Finance Minister Nirmala Sitharaman presented these measures in the Lok Sabha amid Opposition slogans. The initiatives seek to replace collections from the Goods and Services Tax (GST) compensation cess on tobacco products, which will stop once related borrowing costs are cleared in the coming months.

Excise duty on tobacco products and GST compensation cess shift

The GST compensation cess started in 2017 with the rollout of GST. The cess helped compensate States for any revenue loss for five years. During 2020-21 and 2021-22, compensation needs rose, but cess inflows dropped, so the Centre borrowed funds to bridge the gap.

The compensation cess on tobacco products will end after the Union government finishes paying interest on these loans, according to Ministry of Finance sources. Once removed, both the effective tax burden and overall revenue from tobacco products would decline, creating a fiscal gap for the Centre.

Central Excise (Amendment) Bill and excise duty on tobacco products

The Central Excise (Amendment) Bill, 2025, has therefore been placed before Parliament to permit higher central excise duty on tobacco and related products. Its objective is set out as being introduced "in order to give the government, the fiscal space to increase the rate of Central excise duty on tobacco and tobacco products so as to protect tax incidence".

The Bill's 'Statement of objects and reasons' explains the earlier reshaping of taxes. It notes: "With the levy of GST and compensation cess on tobacco and tobacco products, the rates of central excise duties were reduced significantly to allow for the levy of compensation cess without large impact on their tax incidence".

Health Security se National Security Cess Bill and pan masala manufacture
The second proposal, titled The Health Security se National Security Cess Bill, 2025, focuses on pan masala manufacture and other goods. It is intended to "augment the resources for meeting expenditure on national security and for public health" through a fresh cess on specific manufacturing activities.

The cess will be levied on "machines installed, or other processes undertaken in the manufacture of pan masala". Parliament may later extend it to "any other goods which may be notified". The approach differs from usual product-based levies and instead targets declared production capacity at each site.

According to the Bill's 'Statement of objects and reasons', "The cess is linked to the production capacity of machines or other processes rather than the quantity actually produced of such specified goods". It further states: "The Bill provides for taxable persons to self-declare all machines or processes for each factory or premises, and the cess would be calculated in the aggregate for each such location," outlining a self-reporting framework for manufacturers.

Both the Central Excise (Amendment) Bill, 2025, and The Health Security se National Security Cess Bill, 2025, will now go through parliamentary scrutiny and debate. Their passage would reshape how tobacco and pan masala manufacture are taxed, while helping replace waning GST compensation cess collections for the Union government and States.